When I am at national meetings I talk to more and more advisers that are seeking to differentiate themselves in a very crowded marketplace. The most powerful differentiation is by successful retirement funding outcomes delivered to most participants in the plan. But today many advisers still see their added value coming from investment results. Some advisers report to me they are building custom target date funds or risk based portfolios–often largely based upon their personal views and analysis of the investment markets. Since the financial markets are highly efficient over time, this is a very difficult proposition to do consistently.

Recent news reports about expensive litigation over innovative 401(k) investment strategy should give all advisers and plan sponsors seeking investment differentiation some concern. This case is still in its early stage and we do not know the outcome. But there could be many more of these-especially if the strategies underperform more “bland” methods. A former Intel employee has filed a class action lawsuit [Sulyma v. Intel, Case 5:15-cv-04977-NC, October 29, 2015] against the company fiduciaries for allegedly breaching their fiduciary responsibilities by investing employees’ retirement money in “risky and high-cost” hedge funds and private equity funds. The employee claims “Plan participants suffered hundreds of millions of dollars in losses as compared to what they would have earned if invested in asset allocation models consistent with prevailing standards for investment experts and prudent fiduciaries.” This case does raises many interesting questions for all plan fiduciaries. Certainly among the first would be—are innovative investment automatically imprudent if they differ from more standardized investments offered in most 401(k) plans?

According to the complaint, beginning in 2011, the Investment Committee dramatically altered the asset-allocation model for the Intel 401(k) plan’s custom target-date portfolios (TDPs). The suit claimed the Investment Committee implemented an imprudent allocation model. Instead of implementing an asset allocation model consistent with prevailing standards adopted by investment professionals, the Investment Committee implemented an asset allocation strategy for the Intel TDPs that grossly over-weighted allocations to hedge funds, commodities, and international equities as compared to target date funds (i.e., Fidelity or Vanguard) available in the marketplace.

According to the complaint, an index fund-based suite of target-date funds yielded, on average, a three year (as of 09/30/2014) cumulative total return of about +27 percent, while the three year total return of the suite of Intel TDPs was about +7 percent over the same time period. The lawsuit claimed if the Investment Committee had selected index funds for the Intel TDPs, the 401(k) plan and its participants would be far better off. Assuming the hypothetical index investments, the 401(k) Plan and its participants whose accounts were invested through the Intel TDPs would have earned more than $600 million in additional retirement savings as of September 2014 they claimed.

Next installment—we will begin to discuss whether or not ERISA plans have the authority to innovate and what fiduciary steps must be in place to prudently investigate and monitor such investments.

About Greg Kasten view all posts

Dr. Gregory W. Kasten serves as Founder and CEO of Unified Trust Company. He has published more than 100 papers on financial planning and investment-related topics in various financial and business journals; written two editions of the book Retirement Success. In 2007-2009, Medical Economics listed Dr. Kasten as one of "The 150 Best Financial Advisers for Doctors" in the country. Dr. Kasten was inducted into the Advisor Hall of Fame by Research Magazine in 2011 and in 2013 was named Retirement Plan Adviser of the Year by Employee Benefit Adviser Magazine. He has more than thirty years of investment experience.